A common concern for couples is what happens to their joint property when one spouse needs to declare bankruptcy. In general, bankruptcy affects a spouse financially only if there is joint debt or jointly owned assets.
Jointly-owned property may include a matrimonial home and any equity they have built up, joint ownership in a family vehicle, unregistered savings accounts like a GIC or bank account that are in both spouses’ names, or co-owned registered savings like RESPs.
In a bankruptcy, the Licensed Insolvency Trustee (LIT) is required to realize on all non-exempt assets, which includes the bankrupt’s share in any joint property. Below I explain what happens to various types of joint-owned property and what both the bankrupt and non-bankrupt owners of an asset can do to keep their property while achieving debt relief.
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Bankruptcy Impact on Joint Matrimonial Home and Real Estate
While there are specific exemption limit differences between provinces in Canada, in general, bankruptcy law requires the trustee to realize on the equity in your house at the time you file bankruptcy. For simplicity, I’ll use Ontario laws, but the general principal applies to a jointly-owned home no matter where you live in Canada.
In Ontario, the Execution Act states that the debtor’s principal residence is exempt from seizure in a bankruptcy if the debtor’s equity does not exceed $10,000. But if his or her equity exceeds $10,000 in the principal residence, it then becomes subject to seizure. Your Trustee will recommend that you get an appraisal on your home as part of the initial debt assessment to determine how much equity there may be in your house.
What happens if you and your bankrupt spouse own a home with an equity over $20,000?
Consider my example:
Dave is considering filing bankruptcy. Let’s say Dave and Katie own a home worth $350,000. The mortgage on their home is currently $300,000, leaving $50,000 in equity. Based on their legal records, they each own a 50% interest in the home. That means that, as the bankrupt, Dave has a potential realizable asset in his bankruptcy of $25,000.
To avoid the sale of their home, but to allow Dave to declare bankruptcy, Dave and Katie each have the following options:
- Dave could pay his share of the equity value in the home to the Trustee to satisfy his creditors as part of his bankruptcy payments
- Katie could purchase Dave’s share of the equity from the trustee for fair market value.
If making arrangements to repay Dave’s share of the equity to the trustee is not possible for the husband and wife, then the Trustee can obtain court approval for the partition and sale of the property. This would then force the sale of the property at a court-approved price.
A better alternative in these situations is often to file a consumer proposal rather than a bankruptcy. A consumer proposal would allow Dave to make a deal with his creditors to repay a portion of what he owes over a period of up to 5 years, while keeping his interest in the home intact.
Bankruptcy and Joint Home with Ex-Spouse
It’s not uncommon for a separated couple to still own a home together pending formal distribution of the marital assets. If you file bankruptcy during your divorce, but before any divorce or separation agreement is finalized, any assets you own at the time you file are subject to seizure in your bankruptcy including your share of the house even though you are no longer living there. Should you file for bankruptcy, your ex-spouse who currently resides in the home might be affected.
Like my previous example, the impact of bankruptcy on a joint home will all come down to how much equity is available.
If, pending completion of your divorce your ex-spouse lives in the home, your ex-spouse can work with your Trustee to buy out the equity, putting funds in your bankruptcy equivalent to the equity for the benefit your creditors, in exchange for a deed giving them full title to the property.
If the marital home is being sold as part of the divorce, the Trustee may register a lien on the property for the amount equal to the bankrupt’s share of the equity until a sale is completed. The lien will result in any sales proceeds being paid to the trustee ahead of the spouse, but after repayment of the mortgage.
As a best practice, during your divorce proceedings, you should explicitly state in your separation agreement that the ex-spouse who will be living in the home is also entitled to all shares of equity in the home. This way, you can avoid future financial problems if one spouse files bankruptcy.
Bankruptcy Impact on Family Owned Vehicle
If you and your spouse own a vehicle outright, with no financing, and both your names are registered on your vehicle ownership, this means the value of the vehicle is split 50/50 between both owners. In this case, the first thing your trustee will consider is how much the car is worth. In Ontario, bankruptcy exemptions allow a bankrupt an exemption for one motor vehicle up to $6,600. Since you share ownership, if your 50% share of the value of the car is below this amount, the vehicle would not be seized by the trustee.
In the unlikely event your share of the vehicle is worth more than that amount (meaning the vehicle in total could be sold for more than $13,200) you, or your spouse, have the option to “buy out” the difference from the trustee for the satisfaction of your creditors.
If you don’t own the car outright and the vehicle is currently financed, leased, or has a secured charge against it by another creditor, the car will be considered a secured asset and not included in the bankruptcy. You can keep it as long as either you or your spouse stay up-to-date on payments. Should you fall behind on your loan payments, your lender can seize the asset and bankruptcy won’t be able to stop that process.
Bankruptcy Impact on Savings Accounts
Registered savings like RRSPs and company and government pensions cannot be held jointly. A bankrupt’s pension or RRSP is protected in a bankruptcy under the Ontario Pension Benefits Act which means that the assets cannot be seized except for contributions made in the last 12 months.
Because only contributions made in the last 12 months are subject to seizure in a bankruptcy, this can create a tax implication for the non-bankrupt spouse if they have made spousal contributions in the last year. In the case of a Spousal RRSP, the spouse is the registered account owner, beneficiary or annuitant. If the annuitant files bankruptcy, any contributions made in the last 12 months will be seized by the trustee. Tax law in Canada states that if the non-annuitant spouse contributes to the Spousal Plan in the current year or the two prior years, and the annuitant makes a withdrawal, then the amount of the withdrawal will be included in the non-annuitant spouse’s taxable income.
RESPs owned jointly
The only registered savings plan that can be held jointly is an RESP. While the beneficiaries of the plan may be your children, the person who set up the plan, or subscriber, is the plan owner and it is possible to have joint subscribers. If you and your spouse own a joint RESP, each spouse owns an equal share of the funds in the program.
Currently in Ontario RESPs in a bankruptcy are subject to seizure. Should one of you file for bankruptcy, the bankrupt or their spouse can “buy back” their seized half from the Trustee either as a lump sum or as part of the bankrupt’s bankruptcy payments.
Bank and savings accounts
It is not uncommon for spouses to share a joint chequing account. Most people who file bankruptcy do not have significant funds saved in these accounts. In general, the trustee will not pursue seizure of a reasonable amount in a joint bank account if that amount is immediately needed to cover rent, groceries and living costs for a short period of time.
However, legally, joint savings accounts, GICs or other unregistered plans are not protected in a bankruptcy and your Trustee will look to realize on the bankrupt’s 50/50 share in these assets.
Keep Your Jointly-Owned Property with a Consumer Proposal
We often see clients who have a significant amount of equity in their homes and joint savings but not enough to refinance their unsecured debts. In this case, rather than filing a bankruptcy, a consumer proposal is the better debt elimination solution.
A consumer proposal allows you to eliminate up to $250,000 in unsecured debt and has no impact on your joint property whether home equity, vehicle(s), or registered and unregistered savings plans, regardless of their value, so you and your spouse can retain ownership. In exchange for retaining assets, a consumer proposal allows the debtor to make an affordable settlement offer to creditors. Once accepted, the debtor enters into a contract with their creditors to settle the debt owing.
If you or your spouse are facing debt problems and you are concerned about what will happen to your joint property in a bankruptcy, you can speak to a Licensed Insolvency Trustee for a free consultation. We’d be happy to review your specific scenario, provide advice on how your assets are affected and what your best debt relief options.